Neutral on Symmetry Medical

We reaffirm our Neutral recommendation on Symmetry Medical (SMA - Analyst Report), an instrument supplier to orthopedic devices makers, following its mixed fourth quarter results. Its earnings of a penny a share for the quarter missed the Zacks Consensus Estimate of 4 cents.

The Indiana-based company swung to a loss in the quarter on account of charges. Lower sales to major OEM customers led to a double-digit decline in the top line. Sales fell 12% year over year to $84.5 million, yet beat the Zacks Consensus Estimate.

Symmetry witnessed declines across its implants, instruments and surgical cases businesses in the reported quarter. The company retained its sales guidance for 2012.

Symmetry is the largest OEM provider of orthopedic implants and instruments to orthopedic devices manufacturers. Its major customers include Johnson & Johnson’s (JNJ - Analyst Report) DePuy, Stryker (SYK - Analyst Report) and Zimmer Holdings (ZMH - Analyst Report).

Symmetry Medical’s “Total Solutions” approach has differentiated it from other rivals and provided a substantial growth opportunity. Most of its customers are expanding outsourcing, realizing the benefits of a “one-stop shop” solution that allows them to focus their efforts on marketing and R&D.

The acquisition of privately-held electrosurgical instruments maker Olsen Medical augurs well for Symmetry and fits in with its strategy to diversify its product range and boost direct hospital business. The company envisions the acquisition to be accretive to its 2012 results.

Moreover, Symmetry, in December 2011, completed its $165 million takeover of the surgical instruments business of Codman & Shurtleff Inc. ("Codman"), a Johnson & Johnson enterprise. Besides diversifying its revenue base, the acquisition enables the company to broaden its global presence.

Symmetry is investing in revamping its management structure and enhancing customer collaboration, which should support growth. Moreover, the company should benefit from higher demand for its solutions as its major customers ramp up spending and accelerate product launches.

However, Symmetry still faces price and procedure volume pressure on the orthopedic front. Also, the company’s high spending may continue to weigh on its bottom line. Our recommendation is in tandem with a short-term Zacks #3 Rank (Hold).